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• Module overview
• 1. Introduction to budgets
  • 1.1 Introduction to the Budget Process
  • 1.2 Budget types
    • 1.2.1 The Budget Guidelines
    • 1.2.2 The Sales Budget
    • 1.2.3 Budget for Operating Expenses
    • 1.2.4 Profit Budget
    • 1.2.5 Cash-Flow Budget
    • 1.2.6 The Financial Position Budget
    • 1.2.7 Additional Types of Budgets
    • 1.2.8 Additional Budgeting Techniques
  • 1.3 The budget process and its objectives
  • 1.4 Budgets for performance management
    • 1.4.1 Master budget

• 2. Planning the budget

  • 2.1 Planning the Budget
    • 2.1.1 Business income
    • 2.1.2 Visual representation of sales and budgets
    • 2.1.3 The break-even point
    • 2.1.4 Contribution margin

• 3. Controlling the budget

  • 3.1 Controlling budgets
    • 3.1.1 Variance analysis
    • 3.1.2 Taking action to achieve the objectives of the budget
    • 3.1.3 Resource acquisition and usage

• 4. Introduction to Financial Management

  • 4.1 Business Objectives
    • 4.1.1 Maximising profit
    • 4.1.2 Maximising wealth
  • 4.2 Ethics and conflicts in business
    • 4.2.1 The dilemma of ethics in finance, investment and accounting
  • 4.3 Financial Managers
    • 4.3.1 Financial information and objectives
    • 4.3.2 Accounting, the financial information system
  • 4.4 The finance function
    • 4.4.1 Business and financial calculations

• 5. Elements of Business and Financial Management

  • 5.1 Business Structures
    • 5.1.1 Sole proprietors
    • 5.1.2 Partnerships
    • 5.1.3 Corporations and companies
  • 5.2 Reporting financial data and information
  • 5.3 Financial reports
    • 5.3.1 Statement of financial performance (profit and loss statement)
  • 5.4 Capital Markets
    • 5.4.1 Capital Markets
  • 5.5 Regulation and financial institutions
    • 5.5.1 Interest rates, supply and demand and market efficiency
  • 5.6 An overview of taxation implications

• 6. Obtaining Funds: Sources of Long Term and Short Term Finance

  • 6.1 Finance from external sources
    • 6.1.1 Equity finance
  • 6.2 Debt
  • 6.3 Long-term debt
    • 6.3.1 Debentures and unsecured notes (bonds)
    • 6.3.2 Mortgage loans
  • 6.4 Hybrids of debt and equity
  • 6.5 Leasing
    • 6.5.1 Operating Lease
    • 6.5.2 Financial Lease
    • 6.5.3 Distinguishing between an operating lease and a financial lease
    • 6.5.4 Sale and Leaseback
    • 6.5.5 The issue of gearing
  • 6.6 Short-term debt
    • 6.6.1 Bank Overdrafts
    • 6.6.2 Fully drawn advance
  • 6.7 Retained Earnings, internal funds and depreciation

• 7. Managing Working Capital

  • 7.1 Managing current assets and current liabilities
    • 7.1.1 Appropriate level of working capital
  • 7.2 Managing inventories
    • 7.2.1 Reasons for holding inventories
    • 7.2.2 The economic order quantity (EOQ)
    • 7.2.3 Re-order point (ROP)
    • 7.3.4 Safety stock (SS)
    • 7.2.5 Quantity discounts
  • 7.3 Managing trade debtors (accounts receivable)
    • 7.3.1 Credit policies
    • 7.3.2 Collection period
    • 7.3.3 Managing cash and near-cash assets
    • 7.3.4 Managing trade creditors (accounts payable)

• 8. Job Costing

  • 8.1 Accounting information about product, service and project costs
    • 8.1.1 Full costing
    • 8.1.2 Single product/service line
    • 8.1.3 Multi product/service
    • 8.1.4 Direct and indirect costs
  • 8.2 How costs behave
    • 8.2.1 Allocating Overheads
  • 8.4 Cost drivers
    • 8.4.1 ABC and the service industry
  • 8.5 Conclusion

7.3.1 Credit policies

Managing accounts receivable and managing sales are closely related, and they are usually different for sales made by retailers to customers and sales made by one business to another business. In many situations, more goods can be sold either by offering more liberal credit terms or by relaxing credit worthiness standards.

Retail credit. Usually when retailers grant credit to individual customers, they require full payment on a specified date. If they extend the credit period, a minimum regular payment (usually monthly) is expected with interest and/or credit charges added to the outstanding balance for each period.

The use of credit cards has meant that retailers, particularly small and medium ones, can enjoy the increased credit sales for a small percentage fee while handing on the collection risk to the credit card providers/companies.

Trade credit . As with retail credit, management determines the policy for providing credit to trade customers. These policies look at:

• The credit worthiness standards for new customers
• Credit limits
• Size and period of settlement discounts (if any)
• Administration of credit policy

Each of these policy areas influences the pattern of cash flows, sales revenue, credit provision, expenses, profits and investments in assets. The ROI (return on investment) calculation is used to measure the value of any major change in policy.

Credit worthiness

Each person or business gets a credit rating as a result of previous credit transactions. Good payment histories are reflected in good credit ratings, and bad payment records are shown in poor ratings. Credit rating agencies (such as Dun and Bradstreet) keep information on businesses that is given to their subscribers. Rating agencies regularly update their information so that credit checks are up-to-date.

If a new client does not have a previous credit rating (for example, a newly formed company) the business itself must give the information. This information includes bank statements, recent accounting reports, personal references, guarantees from directors and other detail considered necessary before credit is given (the 'five Cs of credit' in Atrill).

Credit limits

There are two kinds of credit limits: the dollar amount of credit allowed and the time limit allowed for payment. Both limits vary depending on the nature of the industry concerned (see the factors influencing the length of credit granted in Atrill, p 416, and work through Example 12.1, pp416-417).

Size and period of cash settlement discounts

Sometimes a firm offers settlement discounts for prompt or early payment to improve its cash flow. For example, the expression 2/10, n30 on an invoice means that customers will get 2% discount on the invoice amount if they pay within 10 days. This means that it will cost the debtor 2% of its purchases to have the extra 20 days credit. This is about 36% per annum!

Administering credit policy

Once a firm establishes its credit policy, it must ensure that terms are correctly administered. This means making sure that there are internal controls in place to protect against customers not meeting their responsibilities, and taking discounts that they are not entitled to.

To avoid a policy being implemented too rigidly, some discretionary powers must be allocated to varying responsibility levels throughout the organization. Some flexibility may avoid offending customers who are having temporary cash flow problems of their own. The key is to show good judgment while not appearing to be too lenient.

An analysis of any credit policy will show that it is an attempt to balance the costs and benefits to the business. The benefits are extra sales and profits, and the costs include an extension of the cash conversion cycle that requires more working capital, and possible bad debts.

The accounts receivable turnover rate

This ratio, which you know how to calculate, is another important aspect of determining working capital requirements. A change in a firm's credit policy affects this rate. It shows how a reduction in the number of times average receivables are collected each year (an increase in the average number of days taken to collect receivables) extends the cash collection cycle.

Sources of credit information

Credit managers must get all the necessary information on the credit standing of new and existing customers so that they can decide whether to grant credit. Regular updates on existing customers helps to avoid losses where a customer's credit standing has deteriorated. Sources of credit information include:

• Reports from credit agencies such as Dun and Bradstreet
• Recent financial statements, which include position statements, performance statements and cash flow statements that allow analysis of key operating and financial ratios. In turn, this allows an assessment of a customer's ability to service (pay) existing and future credit commitments.

Generally whether or not a debtor (another business) pays promptly depends on the following factors:

• The relationship of the debtor's own current assets to current liabilities and the liquidity of the current assets, as shown in their position statement
• The firm's past ability to generate cash from operations, and to borrow and repay debts as shown by the cash flow statement
• The earnings performance of the management, as shown in the performance statement

Credit providers will advise whether a customer has been paying promptly or slowly and whether it has recently failed to make any payments.

Information about the physical condition of the company and its assets may also indicate how promptly the debtor will be able to make payments. Credit managers will want to know how old the operating assets (plant and machinery) are and what condition they are in; whether they are in working order; and how soon they will need replacing. A review of planning documents such as future and past budgets will indicate possible major expenditures.

In the case of a private company, partnership or sole trader, the financial standing of the directors or proprietor becomes important, as they may have to give personal guarantees until the firm establishes its own credit worthiness.

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